“As our members (especially long-term subscribers) know, we look throughout the mining sector to find value for our members. We are NOT a silver-only letter, although many who are not members perceive us in that light. This is not to diminish the fact that most of our time and energy is devoted to the macroeconomic picture and the precious metals; we have suggested copper, manganese, moly, uranium, lithium, and other types of resources for investment.
“In our view there will be a turnaround for nuclear energy in America. It will be a big challenge for the United States and Europe to catch up with Asia’s aggressive use of nuclear energy. China, India, Japan, South Korea, and Taiwan are rushing headlong into the nuclear power era. However, once the USA gets busy building out this industry, it could do wonders for the economy, not to mention the employment picture.
“The bottom line is that the control of energy is the ultimate weapon that can be used between countries or even against a population. Regardless of how much energy might be available it is the control of the resource that will determine price and could cause conflict in the future. Watch oil and energy prices; as oil moves to more than $100 per barrel there will certainly be increased tension on many levels.”
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One of the hardest things for me to remember is not to believe everything I see. I am a sucker for the latest “can’t lose” strategy supported by the experts. This morning I ran across a trade that looked too good to be true. I think it is, but I think it is instructive to walk through the potential hidden land mine. The event is the Wednesday afternoon release of NFLX earnings but there is a hidden trap for option traders using one commonly used earnings play structure.
The construction of the play is that of a “double calendar” spread. The underlying profit engine is an attempt to exploit the routinely seen spike in implied volatility (IV) of the options series most closely following earnings release. In this case, NFLX has weekly options which expire 48 hours after the scheduled announcement.
In order to understand the situation, let’s walk through the components step-by-step. First, is the routinely observed spike in IV seen as earnings release approaches present? As shown in the options pricing matrix below, the IV of the weekly options is substantially higher than the next series in time, the February monthlies:
Next, we need to get an idea of the magnitude of the price movement expected by option traders. This price range can be imputed from the break even points of the at-the-money straddle in the front most options. As shown in the graph below, this analysis gives a current expected price range of 167-203 following earnings release.
Now let us consider a double calendar spread with strikes selected to encompass this anticipated price range. To review quickly, a calendar spread consists of selling a short dated option while buying a longer dated option at the same strike price. An example of such a trade in NFLX is presented below:
That looks pretty sweet, right? We have projected break even points of 147.3 and 238.86 and a probability of profit (P.P.) of 100%. So all we have to do is put this on, wait for earnings, and barring any huge surprise, we take profit of 100% or more home.
What could possibly go wrong? Unfortunately there is a high probability of a sequence of events that will totally erase any profits and likely result in a loss. Go back and look at the option pricing matrix above and focus on the IV of the options we are buying. These options trade at a volatility of 60%. Is that high or low? You tell me from this historic graph of volatility in NFLX options:
As you can see, the current level of volatility that you are buying in the long legs of the calendar is quite elevated on a historical basis. Furthermore, the spread between statistical (historical) and implied volatilities has rarely been greater. This combination of events sets up a high probability of a “volatility crush” on the options you hold long as part of the spread. The moving parts of this crush are:
1. Cessation of the “bleeding” of juiced IV from the weeklies into the monthly series as the weekly option IV deflates massively.
2. Convergence of IV toward the value of historical volatility in order to close the huge divergence in the levels currently present.
This situation sets up a high probability for a negative impact on the trade which will almost certainly result in a loss. Do I know these events will transpire? Absolutely not, and I may be 100% wrong. Survival as an options trader is all about recognizing high probability events and structuring trades accordingly. No free cheese here; time to move along to the next trade.
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Critical Mass – a point or situation at which change occurs – support for the measure has reached critical mass.
By Richard (Rick) Mills
Ahead of the herd
As a general rule, the most successful man in life is the man who has the best information
Our future energy course is being charted today because of the ramifications of peak oil, because cars pollute too much, because of climate change and because we wish to end our dependence on foreign supplied energy.
Many countries have energy independence and global warming as two of the key policy issues of their current administrations. For instance US President Obama made a pledge to eliminate oil imports from the Middle East and Venezuela within a decade and to slash his country’s carbon dioxide emissions by more than 30 per cent by the year 2020.
If any country were to try and implement such a program they would have to do two things:
- Wean their country off using fossil fuels (coal, oil and natural gas) to produce energy
- Develop alternative clean energy sources within their country to avoid energy imports
The Fuel of the Future
The electricity needed for any country to successfully replace fossil fuels, both for transportation and everyday use, will have to come from nuclear generation.
There is simply no other logical alternative:
- Coal and natural gas plants emit carbon dioxide emissions and natural gas needs an incredible amount of investment in pipelines and supporting infrastructure
- Operating a 1,000-MW coal plant, for one year, produces 30,000 truckloads of ash that contains large amounts of carcinogens and toxins. Every second, up the smokestack, goes 600 pounds of carbon dioxide and ten pounds of sulfur dioxide
- Extensive use of hydrogen is not practical due to its volatile nature and lack of infrastructure
- Solar, wind and geothermal are all niche suppliers and are untried on a large scale. Geothermal seems to be limited to a few parts of any country and all three alternative means of generating electricity need massive investment in power transmission lines to get the power to where it’s needed. All three of these technologies are extremely important and each will successfully contribute, in a small way, to energy independence. But none are, today, capable of supplying base load power
- A 1,000-MW solar plant would cover 129 to 259 square kilometers and use a thousand times the material needed to construct a nuclear plant of the same capacity.
- To equal the output of South Korea’s Yongwangs six one-thousand-megawatt nuclear reactors, wind generators would require an 245 kilometers wide extending from San Francisco to Los Angeles. Solar would require roughly 52 square kilometers of collector area.
- High emissions, a negative energy return and severe environmental costs are associated with ethanol and make its use impractical
- Hydro – going to clean eco-friendly energy isn’t accomplished by damming what free-flowing rivers are left
“The potential scope for renewables contributing to the electricity supply is very much less because the sources, particularly solar and wind, are diffuse, intermittent and unreliable.” World Nuclear Association
As the world’s population and standard of living continues to climb, demand for more – and cleaner energy – grows alongside the pressures we continue to put on our environment.
“As a zero-carbon energy source, nuclear power must be part of our energy mix as we work toward energy independence and meeting the challenge of global warming.” Nobel physicist Steven Chu, U.S. Secretary of Energy – May 6, 2009
“The principal motivation to reconsider the nuclear option is that nuclear power, as an alternative to fossil fuel resources, does not impair air quality and does not release greenhouse gases into the atmosphere.” John Deutch, professor MIT
Today, there is an almost global wide move to develop higher levels of nuclear energy production. This is because nuclear energy works, it’s safe and recognition is slowly dawning it’s going to be impossible to meet the global, growing demand for energy and cut carbon dioxide emissions without nuclear energy.
Reasons to Use Nuclear Energy:
- One pound of yellowcake (U3O8 – the final product of the uranium milling process) has the energy equivalence of 35 barrels of oil. One 7 gram uranium fuel pellet has an energy to electricity equivalent of 17,000 cubic feet of natural gas, 564 liters of oil or 1,780 pounds of coal
- Nuclear power’s life-cycle emissions range from 2 to 59 gram-equivalents of carbon dioxide per kilowatt-hour. Only hydropower’s range ranked lower at 2 to 48 grams of carbon dioxide-equivalents per kilowatt-hour. Wind came in at 7 to 124 grams and solar photovoltaic at 13 to 731 grams. Emissions from natural gas fired plants ranged from 389 to 511 grams. Coal produces 790 to 1,182 grams of carbon dioxide equivalents per kilowatt hour. International Energy Agency
- Nuclear energy is the only proven technology that can deliver baseload electricity on a large scale, 24 hours a day, 7 days a week, regardless-of-the-weather, without producing carbon dioxide emissions. Nuclear power plants emit no carbon pollution—no carbon monoxide, no sulfur oxides and no nitrogen oxides to the atmosphere.
- Natural gas accounts for 80% of the cost to produce power from an NG power plant. Uranium accounts for 5%–10% of the price of nuclear energy
- Power production cost results when comparing nuclear/gas, nuclear/coal or nuclear/hydro – only coal is cheaper
- Nuclear energy is reliable. Nuclear power plants do not depend on weather conditions to produce electricity nor do they need costly electricity storage options
- One ton of uranium produces more energy than several million tons of coal and oil. Fuel transportation costs are less and there is less impact on our environment from mining or fracking shale gas
- Nuclear power plants require very little space and can be situated close to where their power output is needed
“Through the release of atomic energy, our generation has brought into the world the most revolutionary force since prehistoric man’s discovery of fire.” Albert Einstein
Supply and Demand
Today, there are some 441 nuclear power reactors operating in 30 countries. These 441 reactors, with combined capacity of over 376 Gigawatts (One GWe equals one billion watts or one thousand megawatts), require 69,000 tonnes of uranium oxide (U3O8).
There are 59 power reactors currently being constructed. In all there are 493 new power reactors planned or proposed with 84 new reactors scheduled to be commissioned by 2017.
The International Atomic Energy Agency, in its 2009 report, anticipates at least 807 GWe in new net capacity to be in place by 2030.
The Energy Information Administration (EIA) projects electricity generation from nuclear power to increase from about 2.7 trillion kilowatt hours in 2006 to 3.8 trillion kilowatt hours in 2030. U.S.
Each GWe of increased capacity will require about 195 tU per year of extra mine production – three times this for the first fuel load. Let’s also consider the fact that no one builds a $4 to $6-billion dollar reactor just to watch it go idle. They will order one or perhaps several year’s worth of fuel supply to guarantee it doesn’t.
By the year 2020, China will have at least 60 nuclear reactors using 20,000 tonnes of fuel per year.
India and France recently signed a multibillion dollar agreement to build two Nuclear power plants in India – Areva SA, will build two pressurized reactors of 1,650 megawatts each. These are the first two in the proposed construction of a total of 20 such nuclear plants in India. India’s need for uranium is predicted to increase 10-fold by 2020.
The Russians are planning to build a large number of nuclear reactors so they can use nuclear power domestically and increase their exports of natural gas to Europe.
“We believe there is not enough uranium production, either current or planned, to satisfy reactor needs, initial core requirements and inventories for new reactors.” Adam Schatzker, analyst RBC Capital Markets
In 2008, mines supplied 51,600 tonnes of uranium oxide concentrate containing 43,853 tU, which means mining supplied roughly 75% of nuclear utility power requirements.
Spot Market and Megatons to Megawatts
The 25% mine supply deficit used to be made up from stockpiled uranium held by nuclear power utilities and the Megatons to Megawatts program.
Utility stockpiles are pretty much depleted and nuclear power utilities are expected to be back in the market, after a long absence, to sign long term contracts for uranium supply starting in early 2011.
China has given top priority to nuclear energy in its 12th Five-Year Plan (2011-2015) and they have already been a very strong buyer of uranium on the open spot market. China Guangdong Nuclear Power Corporation entered into a 10-year agreement to buy uranium at a price that was well above the spot price at the time of the announcement – China is building its strategic working inventory for future nuclear requirements.
Japanese and Indian utility purchases will also increasingly impact the spot market and many countries in Europe are reconsidering their current nuclear policy and extending the life of existing nuclear reactor fleets. New capacity is also being built or considered in both Taiwan and South Korea.
“It appears that the character of the spot market has changed markedly over the past few months from one that was heavily oversupplied with weak demand to one that is in high demand with very little supply.” Adam Schatzker, analyst, RBC Capital Markets
Mine production is now primarily supplemented by ex-military material – the Megatons to Megawatts program. The Highly Enriched Uranium (HEU) Purchase Agreement to convert 500 tonnes of HEU to low enriched uranium (LEU) with Russia will expire in 2013 – Russia has said they will not renew it.
While working for Shell Oil during the 1940’s Dr. M. King Hubbert noticed the production of crude oil from individual oil fields plotted a normal bell shaped curve. Roughly half of the oil from a field has been exhausted when the bell curve peaks.
Carrying that insight further he surmised that oil production from a group of oil fields would follow a similar bell shaped pattern.
In 1956 Dr. Hubbert predicted the cumulative group of oil fields within the US would reach peak production in the 1970’s, and thereafter decline – no matter how much money would be thrown at exploration and development of reserves US oil production would not rise higher after this date. Dr. Hubbert’s prediction was uncannily accurate and is not restricted to just US oil field production.
“In most fields, oil production has now peaked…Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabia’s to maintain production, and six Saudi Arabia’s if it is to keep up with the expected increase in demand between now and 2030.” Dr. Fatih Birol chief economist at the International Energy Agency (IEA)
As is the current situation with oil, the USA, and most other countries, are highly reliant on foreign sources for their uranium.
A country’s dependence on imported energy increases its strategic vulnerability. Energy suppliers who are willing to do so (Russian supplying natural gas to Europe comes to mind) can use their energy resources as leverage – holding whole countries hostage – to pursue their own policies.
“Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.” George W. Bush, 2006 State of the Union Address
Developing countries such as China and India, with 2.3 billion people between them, will, even while increasing their nuclear fleet, drastically increase their consumption of fossil fuels. Oil, natural gas and coal are all going higher in price.
Accessing a sustainable, and secure, supply of raw materials is going to become the number one priority for all countries. Increasingly we are going to see countries ensuring their own industries have first rights of access to internally produced commodities. If any country is to end its dependence on foreign supplied fossil fuels and vastly reduce its carbon footprint it will have to develop its own source(s) of uranium.
Global climate change, reducing our carbon footprints, weaning ourselves off fossil fuels and achieving energy independence are all key issues facing us and future generations and the herd is not paying attention to HOW our future power is going to be supplied.
But as more and more investors figure out how we are going to produce our future energy, companies in the uranium sector could very well deliver spectacular gains for their shareholders. Uranium should be on every investors radar screen.
Is it on yours?
If you’re interested in learning more about the junior resource market, and the uranium sector in particular, please come and visit us at www.aheadoftheherd.com.
Membership is free, no credit card or personal information is asked for.
Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell.com, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard Mills does not own shares of any company mentioned in this report.
No company mentioned in this report is an advertiser on his website aheadoftheherd.com.
Over a month ago I began to issue a warning to traders and investors who were long precious metals that a possible correction was likely. Prices were overextended and nearly every 5 minutes a gold investment advertisement was appearing on my television. Additionally gold advertisements could be heard during commercial breaks of many right leaning radio talk show hosts, not that I listen to them or anything.
This article is not about pounding my chest, it is about a learning process that many investors fail to take the time to learn. It is easy to grandstand and speak in analogies when discussing the financial markets, but in the end the name of the game is to buy low and sell high or sell high and buy low depending on which direction a trader expects an underlying to move. I believed gold was overbought several weeks ago and while my timing was not precise, the eventual price action has followed my thought process.
The single greatest threat to profitability for investors and traders is getting caught up in the financial media and punditry. I try to stay away from the financial media at all costs as I do not want my view of the financial markets blurred or altered by the commentary of a so-called expert that I am not familiar with at all. About the time when I was calling for a correction in gold, the financial media was putting out tremendous bullish hype regarding gold and I’m guessing television channels like CNBC had commentators declaring their love and long term desire to own gold in their portfolio.
This is not to say that gold will not work higher in the future. In fact, research from fundamental and technical analysts suggests that gold prices could continue going higher for several years as the United States continues to devalue our currency while running massive budget deficits. No one really knows for sure what will eventually happen, but it would not be shocking to see gold continue to rally in the future. However, the shiny metal needs to wash out some weak owners by moving lower and working off long term overbought conditions before making a run at breaking out to new highs.
The daily chart of gold futures is listed below:
The chart above outlines a key support level which may eventually be tested. If that price level breaks down, a major correction in gold will be underway and price could potentially test the 1250 price level. For those wishing to get long gold in the future, I would devise a trading plan ahead of time with price points where you would like to add to your position as prices move lower. Gold is experiencing some heavy selling pressure and it could be going through a possible correction. The real question remains: how long will the correction last and how low could the price of gold actually go?
Light Sweet Crude Oil
Oil prices have been trading relatively choppy over the past few weeks. Light sweet crude oil futures were under significant selling pressure on Thursday and price was nearing the 50 period moving average setting up for a possible test. As the daily chart of oil futures indicates, the 50 period moving average has offered key support several times in the past few months.
Until proven otherwise, the trend in oil continues to be higher and the 50 period moving average offers a potentially defined risk level. Should prices extend below the 50 period moving average on strong volume, we could see oil sell off to the $84/barrel price level. While in the longer term oil will likely have fundamental and technical bullish indicators, it is possible we could see a corrective decline before any major move higher transpires. The daily chart of light sweet crude oil shown below illustrates the 50 period moving average and the key support level located at the $84/barrel price level.
As for the future prices in gold and oil, it remains to be seen as to what happens to both commodities in coming days and weeks. I would not be surprised to see oil outperform gold, particularly if the U.S. Dollar Index rallied higher. As for right now, I am going to be watching the price action waiting for a low risk setup to take shape.
In closing contrarian investors are generally rewarded for their unique ability to go against the grain time and time again. Doing the opposite of whatever the “herd” does generally leads to over performance in almost any endeavor, what would make financial markets any different?
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Recently, I met the owner of a well-known precious metals web site and I popped this question to him: “What do you think about investing in silver?”
His reply was both profound and accurate. “David,” he said, “The smart money is moving into gold, but the SMARTEST money is moving into silver!”
Investing in silver is a great way to make money, especially if you are looking to secure your future or your retirement. But of course, just like any type of investing, there are no guarantees. You need to know what you are doing and what the silver market is all about before you can get too involved. This is the only way to make sure that you give yourself every possible advantage to benefit from silver investing.
7 Silver Investing Tips That Will Help You Make More Money
1. Take a close look at the market before you decide that silver investing is right for you. Investing in silver is different than investing in stocks and bonds.
2. Educate yourself. If you are not sure how investing in silver works, touch base with a professional who can help you with the buying and selling process.
3. Complete effective online research. Be careful of the information you find. There’s so much information online about silver investing, but a lot of it is misinformation. You want to learn from experts who are in the trenches tracking the silver market and making investments every day. For example, the information that you will find on http://www.silver-investor.com is based on my experiences and knowledge from following the silver market daily for more than thirty years.
4. Get familiar with the many different ways that you can invest in silver. You can invest in silver mining companies, silver ETFs, silver futures, silver bullion and silver coins.
The sure-fire way to invest in silver without the worry is to invest in bullion or coins.
This is the place to start — real metal for your future. You don’t have to pay for a mining company’s energy costs. And you don’t have to buy 1000 to 5000 ounces in a futures contract that carries too much risk for a beginning silver investor.
5. If you are looking to invest in silver coins and silver bars then you need to know this trick — Find sellers who are selling as close to the spot price of silver as possible (spot plus a reasonable fee). A general rule is that the more silver you are buying the less percentage of fees you should be expected to pay. When buying coins it is usually best to buy bullion coins or silver rounds, not buying coins for their numismatic value (the value to a collector of rare coins). Let me add further that if you are a coin collector that is a different matter, but bullion coins are usually the best choice for most investors.
6. Before you invest in silver, make sure you calculate how much you can invest between your IRA rollover funds, cash on hand and other assets that you wish to turn into silver. Be sure to keep your emergency fund mostly in cash for unforeseen expenses. You don’t want to bite off (invest) more than you can chew (afford).
7. Stay on top of the market. There are times to buy. And, there are times to sell. Yes, at some point, it may be better to sell some or perhaps even all of your silver holdings for currency, depending on the bull market and your personal investment goals. But the only way you know when to buy or sell is if you have current silver market investing information at your fingertips. Our reports are devoted to helping you make the best decisions in the precious metals market. Silver-Investor.com was the first website that focused on this indispensable metal.
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By: David Morgan
Today the stock market bled out with a river of red candles. All of the recent gains vanished in one session. Strong selling volume sessions like this are typically a warning sign that distribution selling is starting to enter the market.
Distribution selling is when the big money players start unloading large positions in anticipation of a market top. They do try to hide it by selling into good news or earnings when the average investors are buying into all the hype of better than expected earnings on the news. As average investors jump into the market because of the good news, this extra liquidity helps the big money players (banks, hedge funds, etc..) sell large amounts of their positions to the eager buyers. This is why the “buy on rumor and sell on the news” saying is kicked around wall street….
To me, panic selling is typically seen as a bullish sign to enter the market simply because if everyone is/has rushed to the door to sell what they own, then really most of the down side risk has been taken out of the market. That being said after an extended multi month rally and higher than selling volume I look at it more like distribution selling and a shift in momentum.
I feel the precious metals sector will be starting something like this in the near futures, and possibly it has already started as seen in the rising volume on the down days.
Let’s take a look at the charts…
AAPL – Apple Stock 10 Minute Chart
Two days ago AAPL shares took big hit because of some medical issues with the CEO, the shares did float back up. But what is important here is the distribution selling which took place after Apple came out with much better than expected earnings. The general public loves to buy good news especially when it’s for a famous company. But large sellers stepped in unloading as much of their position as they could before making it look to obvious.
The average investor listening on the radio or catching snippets on the news do not pick up on these things which is why the big money players can get away with this over and over again.
GS – Goldman Sachs 10 Minute Chart
Goldman came out with average earnings being just above estimates and the share price took a beating with very strong volume.
Distribution selling looks to be entering the market and this is a bearish sign. I would not be surprised if we see the market top out in the next 5-10 trading sessions.
SPY – SP500 10 Minute Chart
Here you can see my green panic selling indicator spiking up much higher than normal dwarfing the past sell off spikes. This makes me think the big money is now starting to unload which will shift the current upward momentum to more of a sideways whipsaw type of price action. Eventually it will roll over and a new down trend will start.
As you can see from this chart the SP500 is trading down at a support level so a bounce is likely going to take place. If in fact today was the first distribution day then the big money should let the price inflate back up to the recent highs and possibly make a new high to help keep investors bullish before the hit their SELL BUTTON again… They like to play these games and understanding them is a key part of trading. Expect choppy price action for a week or two…
Silver Daily Chart – The Next Wave of Selling?
I look at silver and gold as one… so what I show here is the exact same for gold.
As you can see silver is trading under 3 of its key moving averages and todays bounce was sold into after testing the 14 and 20 period moving averages.
Take a looking at the bottom of the chart and you can see distribution selling volume as the spikes are all down days. If silver breaks below the $28 level then we could easily and quickly see the $26 and maybe even the $24 level.
The Mid-Week Market & Metals Trading Conclusion:
In short, the financial power players are pulling out all the tricks to shake traders out of their positions. A lot of people shorted the market in the past 2 weeks only to get hung out to dry and most likely stopped out of their short positions for a loss. Fortunately we did the opposite taking another long position in the SP500 ETFS because my market internal indicators, market breadth and simple trading strategy clearly pointed out that the average investor was trying to pick a top by shorting the market. As we all know, the market is designed to hurt the masses which is why I focus on the underlying trends, price action, volume and market sentiment for timing trend changes.
That being said, I still think the market could grind higher and make another new high. But any rally or new high will most likely get stepped on with heavy selling. Expect strong selling days followed by a couple days of light volume sessions where the price drifts back up into resistance levels. This could take a week or two to unfold so don’t jump the gun and short yet. It’s best to see more distribution selling before picking a top.
If you like this trading reports or if you would like to get my daily pre-market trading videos, intraday charts, updates and trade alerts be sure to join my newsletter: http://www.thegoldandoilguy.com/trade-money-emotions.php
David A. Banister- www.markettrendforecast.com Jan 16 2011
My most recent forecasts for the SP 500 and Gold have been calling for interim peaks in both around Mid- January. Gold, I told my subscribers a few weeks ago, was definitely topping and likely to drop now to $1270-$1280 per ounce before resuming the Bull Market advance. The SP 500 I have forecasted a 1285-1315 topping area since the 1175 pivot lows on that index, and we are very close as well in that regard.
Gold has been in a 9 plus year bull market since 2001 and has another 3 years plus left on this Bull run. However, pauses must occur along the way and this should be a 4th wave corrective Elliott pattern if my views are right. This is taking the form of a 3-3-5 correction from the $1430 top. We are in the final 5 waves down now, and it’s about to get ugly near term so strap on your seatbelts. My chart forecast is below and if I’m right, there will be excellent opportunities to pick up some good Juniors and also the precious metals themselves around that $1270-$1280 area. Following this correction, we could have a run to about $1515 per ounce, and I expect this entire pattern to take 6 monthsl months to a year to play out from the $1430 top to the $1270 ish bottoms, and back to $1515.
The SP 500 is completing the final 5th wave movement from the 1010 Jul 1st lows this past summer. This is only the first full wave pattern movement of a big 5 wave leg up from July 1st. What this means in English is we have a near term top likely in the 1285-1315 areas, followed by a wave 2 correction to around the 1175-1180 areas. Sentiment right now is running at major extremes last seen at interim peaks in January of 2010 and April of 2010 where I had also forecasted tops within days of the peaks. I am looking for the SP 500 to end up around 1600 on the index after this coming wave 2 correction, but I like to take it one pivot and step at a time. Below is my forecast chartwise:
If you would like to benefit from learning more about Elliott Wave based forecasting using my methods, which have been historically accurate, please check us out at www.marketrendforecast.com There is a coupon available if you’d like to subscribe or you can sign up for free occasional reports.
The U.S. Dollar Index Futures have been sold heavily and interestingly enough, gold and silver have not rallied. In fact, gold and silver have sold off while the dollar experienced downward price action as well. How does that whole scenario make any sense? I do not fancy myself as an expert in the area of reasoning why a stock or commodity rises or falls. I firmly believe that the media is nearly always wrong as to the real reasons stocks and commodities are rallying or falling.
I believe that the market is a giant discounting mechanism. The market discounts news, political variables, and the future supposedly. It is hard to know if the future is actually priced in, but the experts say that it is as do the academics, therefore we might as well consider it fact else be thrown to the proverbial wolves. The point in all of this is that I have no earthly idea why the U.S. Dollar, gold, and silver were all sold on Thursday. I would also point out that light sweet crude oil futures closed the day lower.
I can’t believe I am about to say this, but I believe the U.S. Dollar Index may be setting up to rally here. If we take a look at the daily chart of the U.S. Dollar Index Futures we can see that the dollar has been under serious selling pressure accompanied with high volume. However the price action represented on the chart below illustrates that support is located around its 50 period moving average. It might take several days before the U.S. Dollar forms a bottom, but should it start to rally it may attempt to break out over recent highs.
Time will tell, but the U.S. Dollar has several support levels that should help support the price action and push prices higher. A rally in the U.S. Dollar would be somewhat contrarian as most people are expecting a pullback. I am not trying to imply that the U.S. Dollar is going to rally for the next 5 years. I am trying to point out a short term rally in the dollar is possible right now based on the daily chart. I would urge caution for those who are leaning heavily into shorting the dollar as it could backfire, particularly if gold, silver, and oil are unable to rally on dollar weakness.
The U.S. Dollar Index futures (/DX) traded lower on heavy volume today yet gold futures (/GC) closed the trading session down around $11.70 / an ounce or (0.83%). We have all been conditioned to believe that the U.S. Dollar Index and gold move inversely with one another. For those of you that say this inverse relationship is constant I would love an explanation of how this happened. I have been ridiculed for discussing the possibility that gold and silver could go through a correction. When we look at the gold futures daily chart, the price action is ominous as it is currently trading below its 50 period moving average while it has put in a lower high.
In addition to the selling pressure in gold, silver futures were unable to move higher on the lower dollar. In fact, silver futures closed trading down by nearly $0.42 an ounce, or (1.45%). Silver performed worse on a lower dollar than gold. The daily chart of silver futures (/SI) reveals that price is testing the 50 period moving average and at this point a rally is still possible. The daily silver futures chart is shown below:
Another reason to be cautious of precious metals in the short run is the price action in the gold miners ETF GDX. The daily chart of GDX leaves little to the imagination as it was sold off heavily on Thursday. GDX traded lower by $1.85 / share or (3.20%) which is not exactly a great way to demonstrate relative strength in the marketplace. The action in GDX on Thursday was quite simply ugly and more selling could transpire in coming days. The daily chart of GDX is illustrated down below.
It remains to be seen if the price action today in the U.S. Dollar, precious metals, and the miners really means much of anything. However, it would be foolish to ignore the price action in the metals and the U.S. Dollar Index. The divergence from the norm could be a warning that gold and silver are about to go through a correction. The price action in GDX would be supportive of that conclusion and the dollar trading down near a support level where a bounce higher is likely also point to potentially lower prices in the precious metals complex.
In the short term I am very cautious with regards to precious metals and the miners, while I am cautiously bullish about the U.S. Dollar Index in the short run. For those trading precious metals, the U.S. Dollar, and the gold miners risk is excruciatingly high.
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There is a potentially big setup in precious metals sector along with the dollar which looks like its about to unfold. Since mid-October of last year gold started to show signs of distribution selling. Only a month later in November silver started warning us that some big players were taking some profits off the table also. Distribution selling is easy to spot on the charts. In short you will see heavy volume selling accompanied with strong moves to the downside.
Now if we look at the US Dollar chart we see the exact opposite price action. We see sharp rallies during October and November of last year. It’s normal to say that gold and silver move inverse to the Dollar so this price action makes perfect sense.
The interesting thing with the US Dollar is that in Nov-December it rallied breaking through a key resistance level and has been consolidating above support ever since. If this bullish pattern (bull flag) plays out, then it’s just a matter of time before the dollar makes another strong rally upwards, which will put downward pressure on stocks and commodities.
Take a look at the charts below…
US Dollar Daily Chart
The 50 period moving average has provided key support/resistance levels for the previous trends and if it holds true going forward then we are not far from another rally in the dollar.
Gold Futures Daily Chart
Gold moves inverse to the dollar so if we get a higher dollar then look for gold to have a stair step pattern lower.
Silver Futures Daily Chart
Silver looks about ready to do the same thing as gold.
Precious Metals and Dollar Trading Conclusion:
In short, we could see a major shift in momentum from up to down in both precious metals and the equities market. Keep in mind the market has a way of dragging out patterns/moves so whilethe chart looks bearish and I think a reversal is near, things could just chop around for another month or so before a definitive breakout is made. This is why you don’t want to anticipate moves (pick a top). Currently I am neutral on metals and the dollar waiting for a setup which must have clear risk/reward characteristics.
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For endless months we have stressed the death of the dollar, and it seems the mainstream press has certainly taken up that mantra recently, talking about currency wars, currency crisis, and emergency “sessions” or meetings taking place all over the globe. In fact, we sent out a piece from the MSM (mainstream media) about China and Russia agreeing to do business in each other’s currency instead of using the U.S. dollar.
The never-ending debate revolves around inflation and deflation, but to our thinking the discussion could revolve around default. When a debt becomes too cumbersome a default is inevitable. For example, if you borrow “money” for a house purchase and lose your job and cannot afford the payments (debt service) you have defaulted on the debt. In the worst-case scenario, a sum is borrowed, no payment is made, and a total default takes place. In simple language, the money is borrowed and never paid back. There is also a partial default, where perhaps a third party will come in and pay 20 cents on the dollar to extinguish the debt.
It is no different for a nation state, and this has taken place in recent history, so the idea of a government default is valid. The inflation argument maintains that governments or specifically the U.S. government or the “Euroland” government (there is no euro government just a currency) will continue to make good on their debt obligations. In fact, this is the basic premise we have offered from the beginning—we are nearly certain that governments will do everything in their power to keep inflating (printing) to prevent a default.
This has been the case with QE2 and other efforts so far on the part of the U.S. and other nations around the world. The problem is that by continuing the game they too are defaulting. What are we discussing? Look at the end point where the currency—the euro or U.S. dollar—becomes worthless (worth = zero). You as a lender (you bought T-bills or T-notes, or T-Bonds) are “repaid” but were actually defaulted upon because the payment you received was the same as if you received no payment at all. To our thinking, an outright default is more honest because you know that your holdings devalue immediately. Whereas in keeping a time obligation, you are stuck guessing and hoping things will get better in the future.
This is the dilemma faced by the world. Those in the know can do the math; it is currently impossible to pay back what is borrowed and maintain all the current services provided by the modern state. So, currency destruction continues, while the chances of any economy being able to grow their way out of this problem become dim indeed.
However, the velocity of money is still low enough so as not to concern the debt markets greatly. This means that currency destruction is not a function of how much debt exists; more than enough debt (that cannot be paid back) exists currently without adding a penny more in interest, but at what rate is the debt exchanged (velocity) for money. In other words, as long as China, Japan, and other holders of U.S. bonds are willing to hold, the problem can be delayed, but once the sale of new debt becomes impossible (currently this is close to the case) and the Federal Reserve is buying the new debt offered by the U.S. Government, the game is getting closer to the end.
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